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Indian Solar Sector – Shining or hiding behind the clouds?

Feb 03, 2012

National Solar Mission’s second round of bidding for the remaining 350MW of Phase I that concluded in November’11 surprised industry veterans not only in India but across the globe with the price touching an all-time low of Rs 7.49/kWh.

Auction system was similar to round 1 and solar developers who offered the highest discount to base tariff of Rs15.39/kWh won the bid. The highest discount was presented by Solaire Direct which led to a bid price of Rs 7.49/kWh for a 5 MW plant in Rajasthan followed by Welspun Solar which won a 20MW plant in Rajasthan at a bid price of Rs 7.97/kWh, a 15MW at Rs. 8.05/kWh and another 15MW at Rs. 8.14/kWh.

Low bids- market entry strategy?

Interesting thing to note is that some major players like Acme Tele Power, HPCL, Surana Ventures, IL&FS, NMDC, PunjLloyd etc. lost in the JNNSM round 2 bidding and there were some which bid at zero discount. Given that the most aggressive bids were typically presented by international bidders, one wonders whether such low bids were just a market entry strategy.With fiscal incentives being withdrawn or decreased in most European markets due to the economic slowdown, India seems to be a promising market for these international developers. As per Thierry Lepercq, chairman of Solairedirect, the second largest solar company in France, the company has been able to achieve levelized cost of electricity (LCOE) equivalent to Rs. 9 in France and is well on its way to reducing it to Rs 6 in the next two years.

Compared to the first round auction in 2010, dynamics of the solar industry have changed with decreasing European demand due to withdrawal of subsidies and increasing capacity of Chinese manufacturers leading to oversupply in the solar market. All these factors have led to a sharp decline in module cost with current price in the range of USD0.90 per Watt thus leading to a decrease in the total system cost. Moreoverwith a cap on installations in major solar markets such as Germany, France and Italy, panel prices are expected to drop further during the year. However, it is anybody’s guess whether these prices levels will continue for the next few years. James Abraham, CEO, SunBorne Energy is of the opinion that low module prices may be possible in 2012 given the global supply imbalanceshowever he does not see these levels being sustained through the next year.

Many industry analysts are of the opinion that the rock-bottom prices bid by Solaire Direct is probably a way of gaining entry into the Indian market and establish its foothold.

One needs to see if this represents a trend wherein established developers capitalize on their existing balance sheet strength to gain entry into the high potential Indian solar market.

Case for faster grid parity

Considering the results of the latest bidding round of JNNSM (even excluding the very aggressive bids), it seems solar power will become cost competitive with grid power (read thermal power) sooner than expected. “I strongly feel we will achieve grid parity long before 2020. There is a lot of engineering investments and supplier investments happening, as well as innovation. We should see the fruit of this by 2015. Also, conventional power is facing cost pressures from fuel availability, capital costs, and operations” as per Mr. Abraham. With significant drop in panel prices, PV system costs currently stand at around Rs 10-10.5 crores/MW compared to Rs16-17Cr/MW less than 2 years ago. Falling system costs on one hand and rising costs of conventional energy (increase in prices of imported coal) is making it reasonably clear that solar energy will reach grid parity much before the initially slated time frame, 2020.

Decreasing costs translating into faster progress on ground?

Aggregate capacity of grid connected solar during phase 1 of JNNSM projects is targeted to reach 1000MW by 2013 out of which 500MW of PV projects (150MW in batch I and 350MW in batch II) and 500MW of solar thermal projects (batch I) have been selected through a bidding process.Out of the 37 projects selected in batch I, 35 have achieved financial closure and are expected to be on track for timely installation.However, as per MNRE’s recent data only 143.5MW of grid connected solar plants have been commissioned in India as on 24th November 2011 – clearly a lot more action is required on ground to meet the 2013 target of 1000 MW.

Verdict on the future of the Indian solar industry is not out yet and with market sending mixed signals, its best to wait and see if the sun truly ends up shining on the Indian solar industry or whether this ends up being a case where Sun remains in sight but shaded by the clouds.

The author, Aparna Khandelwal is a Senior Associate at a sustainability consulting firm cKinetics.

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